4 strategies for using certificates of deposit (CDs) to grow your savings
Learn strategies for growing your savings with certificates of deposit
Aug. 22, 2022
Quick question: If we asked you to name the types of accounts you would use to save and grow your money, what would you say?
You most likely answered investment accounts. Maybe you also thought of accounts such as regular savings or money markets, or retirement accounts like IRAs or 401(k)s. Those are all good options, but have you also considered certificates of deposit, or CDs?
With interest rates at or near zero over the last two years, many savers have overlooked CDs in favor of other options with potential for higher growth. As interest rates rise and markets remain volatile, CDs offer attractive benefits other account types may not provide.
One such benefit is a fixed rate of return. A fixed rate of return is particularly attractive during a market downturn or during times of high market volatility. However, it’s just one of the benefits CDs offer when you’re trying to grow your savings. Here are a few others:
• Savers can use CDs to create fixed income.
CDs come in a range of term lengths, most commonly between 30 days and five years. Savers can purchase CDs of varying term lengths to create future income. For example, let’s say Joanne Johnson is 62 years old and plans to retire in a year. She would like to wait until full retirement age to start Social Security benefits, so she needs to find other sources of income to fill the gap. Joanne purchases three CDs with terms of one, two and three years. When each CD matures, she plans to use both the principal and the interest within the matured CD to help cover her fixed expenses.
• CDs can reduce risk inherent in other account types.
Sure, market-linked assets like an investment account, an IRA or 401(k) have a higher potential for growth. But that potential also comes with an increased risk of loss. When you put some of your money into a CD, you receive returns and balance out some of the risk inherent in your other investments.
• Getting started requires less money upfront.
CDs sometimes have lower initial deposit amounts than other account types, making them a good way to start saving money without a large financial commitment.
• Savers can take advantage of rising interest rates.
If your CD matures, you can reinvest the funds into a new CD and potentially lock in higher rates. For example, Paul Smith opened a 12-month CD in September 2021, when interest rates were very low. Now that the CD is maturing, he can take the funds ― both the principal and interest ― and purchase a new CD. Since interest rates are on the rise, Paul can get a new CD with a potentially higher rate of return.
While CDs offer a host of benefits, consider how soon you need your funds. Once you purchase a CD, you have limited access to the funds until the CD matures. If you liquidate the CD early, you could end up paying early termination fees. Before you open the account, be confident that you’re not going to spend the money until after the term is up.